Foreign National Planning

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Over the past decade there has been a boom in U.S. based life insurance sales to Foreign Nationals. These Foreign Nationals, specifically those of high net worth, aren’t necessarily buying the life insurance for the “death benefit” as their primary goal. Rather, they are seeking to take advantage of the policy benefits during their lifetime. Specifically, they are setting up these policies as investment vehicles in which the underlying cash values are protected from principal loss and will grow without income tax or capital gains tax (under U.S. tax law). If structured properly, they can also access the cash values without tax and enjoy the funds during their lifetime. Ultimately, the policy will pay a death benefit which will help shift wealth (income tax free) to future generations in an asset-protected environment.

While this strategy can be very advantageous for these clients, most firms in the U.S. are unfamiliar with how to procure life insurance for Foreign Nationals and the international tax laws that one must navigate. If done incorrectly, the end results can be disastrous from a tax perspective. Copperstone Partners has been working in the international marketplace for over a decade and has extensive experience in procuring and structuring Foreign National insurance.

In this newsletter we will briefly explore the 6 main reasons why Foreign Nationals are utilizing U.S. life insurance structures to their advantage and the requirements necessary for successful procurement.

6 Reasons for Purchasing U.S. Life Insurance

1. Cost Savings – The U.S. has the single most competitive life insurance industry in the world. As a developed nation, we also have lower mortality rates and thus lower mortality costs. The combination of competition and low mortality costs creates substantial savings potential. For example, a comparison of U.S. life insurance to Mexican life insurance would show a discount between 60% and 80% in the premium costs. This translates into exponentially higher internal rates of return on both the cash value build up and the death benefit for the heirs. In some countries, and if structured properly, the deposits (premium payments) can be tax deductible to the business. This, coupled with the tax benefits of the policy itself, make for unbeatable tax planning.
2. Tax Efficient Investing – For over a century, life insurance in the U.S. has retained very favorable tax treatment on the cash value accumulation within a policy. If structured correctly, the cash value within a policy will accumulate without tax. It can also be withdrawn without tax using loans (which are ultimately repaid by the death benefit, which is also free of income tax). This makes life insurance a very attractive and safe investment vehicle. U.S. insurance companies have a wide array of options to choose how the underlying cash values will be invested. Two of the most popular are “Whole Life” policies (which yield a guaranteed fixed return) and “Indexed Universal Life” policies, which allow for participation when the market goes up and principal protection if the market goes down. Below are historical net compound averages on the underlying cash values for both types of policies:
   
   

   Policy Type	30 Year Historical Net IRR (tax free)
   Whole Life	6.36% annually
   Indexed Universal Life	8.3% annually

   
   
   
3. Asset protection/ Pre-Immigration Planning – Life insurance policies and their underlying cash values are often considered a safe haven for asset protection purposes. Another layer of protection is added through the use of trust ownership. These trusts can be either grantor or non grantor trusts which can help provide anonymity and if done prior to immigration, can help avoid exposure to U.S. transfer/estate tax.
4. Patrimonial Planning – It is very common for Foreign Nationals to own U.S. based assets and/or have U.S. beneficiaries (i.e. a grandchild born in the U.S. or a child who was educated in the U.S. and never left). This scenario raises a whole host of international tax issues related to U.S. estate tax and the transfer of domestic and foreign assets. If structured correctly, life insurance can be a great tool to create tax-free liquidity for future generations. If done properly within a trust (i.e. Dynasty Trust), those assets could avoid transfer tax to all future generations.
5. Dollar Denominated Assets – As the world’s reserve currency, Foreign Nationals have often found the dollar to be a safe place to store cash, especially when their home country has a volatile currency. Currently, many are storing their money in short-term treasuries which have minimal yield. Life insurance policies with fixed returns offer tax efficiency and much higher yields while still allowing for dollar denominated assets.
6. Reputation and Financial Stability – Never in U.S. history has a life insurance company not paid a death benefit due to financial insolvency. The U.S. life insurance industry has its roots back to the mid 1800’s and many of those companies are still around today. Many have incredibly stable balance sheets as they are both conservative and highly regulated. For example, some U.S. companies have a 150-year history of paying dividends to policy owners without ever missing a single year (even through the great depression). That said, there are some insurance carriers that have ancillary business activities (ie. AIG) that have been them at risk. It’s for this reason that Copperstone works only with insurance companies that meet stringent criteria and have demonstrated financial stability over many consecutive decades.

Requirements

For Foreign Nationals to procure life insurance from a US Carrier, there are different requirements than a U.S Citizen. These requirements differ for each country of origin, so it is important to use an insurance firm who is intimately familiar with the laws of each country. One universal requirement is that if Foreign Nationals want to invest in a U.S. life insurance structure, they must travel to the U.S. to complete the underwriting exam and paperwork.

Beyond international tax laws, each insurance company has its own specific underwriting guidelines (some more favorable than others). For example, some insurance carriers require U.S. based assets while others require none. Some require U.S. ownership of the policy such as a trust domiciled in the U.S. There are also limitations on the amounts of insurance one can procure because the reinsurance markets in the U.S. are more stringent with Foreign Nationals for “jumbo” cases.

Summary

The use of U.S. based life insurance for Foreign Nationals is a very attractive option. However, due to the complexity of international law and differing insurance company guidelines, one could completely nullify the benefits if done without taking the appropriate steps.

Copperstone Partners has been working in the Foreign Nationals marketplace for over a decade. To add to our knowledge, we have a network of accounting and law firms in various countries from Mexico City to Switzerland that rely on us for our expertise in this niche and who continue to help us stay current on all changing laws in the international community.

Please call us at 888 773 6787 to discuss how a U.S. based life insurance structure may greatly enhance your financial planning.